As a limited company owner, contributing to a pension through your company is one of the most tax-efficient ways to save for your retirement while reducing your corporation tax bill. Understanding the rules, limits, and processes ensures you maximise these benefits while keeping your business on track. Below, we’ll explain how this works and the key considerations to bear in mind.
Why Employer Pension Contributions?
When contributing to a pension as a limited company owner, employer pension contributions are particularly tax-efficient because:
- Tax Deductibility: Employer pension contributions are treated as an allowable business expense, meaning they reduce your company’s taxable profits and, therefore, your corporation tax bill. This makes it a cost-effective way to save for your retirement.
- No National Insurance Contributions (NICs): Unlike salary payments or bonuses, employer pension contributions are not subject to employer or employee NICs, providing further savings.
- Reduced Personal Tax: By making pension contributions directly from your limited company, you avoid the need to first pay yourself dividends, which would incur dividend tax. This allows you to save more efficiently, as the company contributes pre-tax funds directly to your pension, bypassing additional personal tax liabilities.
Important: Ensure your contributions are set up as employer contributions with your pension provider, not personal (employee) contributions. The tax treatment differs, so confirm this with your pension provider or financial adviser if you’re unsure.
Using Bookkeeping Software to Track and Plan:
If you use bookkeeping software, it can be a powerful tool to:
- Track Profits: Monitor your company’s financial health and determine how much profit you’re generating. This is crucial when deciding the optimum amount to contribute to your pension.
- Avoid Over-Contributing: Keep an eye on your cash flow and profit levels to ensure pension contributions remain sustainable and don’t negatively impact your business operations.
- Stay Organised: Bookkeeping software makes it easy to categorise pension contributions and keep your records compliant for accounting and tax purposes.
Limits to be aware of:
While employer pension contributions are tax-efficient, there are limits and rules to follow:
1. Annual Allowance:
The total contributions to your pension—both employer and personal—cannot exceed £60,000 per tax year without triggering a tax charge (the limit was £40,000 before 2023/24).
If you’re making personal pension contributions, the maximum you can contribute and still receive tax relief is restricted to the lower of £60,000 or 100% of your relevant earnings. Relevant earnings include employment or self-employment income but do not include dividends, which are often a director’s primary income source.
However, this restriction does not apply to employer pension contributions made by your limited company. Employer contributions are treated as business expenses and are not tied to your personal income.
Why this matters: If you draw a low salary (e.g., £12,570) and take most of your income as dividends, your personal contributions would be restricted. In contrast, your company could contribute significantly more—up to the £60,000 annual allowance or higher if you use unused allowances from the previous three years—as long as the payments pass HMRC’s “wholly and exclusively” test.
2. Wholly and Exclusively Rule:
To qualify as a tax-deductible expense, the contributions must pass HMRC’s “wholly and exclusively” test. This means the contributions must be made for the purpose of the company’s trade (e.g., as part of your remuneration package).
3. Carry Forward Unused Allowances:
If you haven’t used your full annual allowance in the past three tax years, you may be able to carry forward unused amounts, provided you had a pension scheme in place during those years.
4. Lifetime Allowance (LTA):
Although the LTA has been removed as of April 2024, tax charges may still apply when taking large lump sums or drawing income from substantial pensions. If you anticipate significant growth in your pension pot, seeking professional advice remains essential to avoid unexpected tax implications.
Choosing a Pension Provider
Choosing the right pension provider or investment strategy can significantly impact your long-term savings and retirement goals.
Important: As accountants, we are not authorised to provide advice on which pension provider to choose or which investment options to select. This is because choosing a pension provider or making investment decisions is regulated financial advice.
If you need assistance selecting a provider or understanding your investment options, we can recommend a trusted Independent Financial Adviser (IFA). They will guide you in choosing the best pension plan for your needs and ensuring it aligns with your retirement goals.
How We Can Help
At The Orenda Collective, we’re here to help you make the most of pension contributions through your limited company. Here’s how we can support you:
- Tax Planning: We can help you understand how pension contributions impact your company’s tax position and ensure you’re operating within HMRC’s rules.
- Bookkeeping Assistance: If you’re unsure how to track pension contributions in your bookkeeping software, we can provide guidance.
- Referral to an IFA: If you need personalised advice on pension providers or investments, we’d be happy to connect you with a trusted IFA.
Get in touch today to take the next step towards tax-efficient savings and a secure future.
Frequently Asked Questions (FAQs)
1. How much can my limited company contribute to my pension?
Your limited company can contribute up to the annual allowance of £60,000 per year. If you have unused allowances from the previous three tax years, you may be able to carry them forward, increasing the amount you can contribute.
2. Do employer pension contributions count as a business expense?
Yes, employer pension contributions are treated as an allowable business expense, meaning they reduce your company’s taxable profits and corporation tax liability.
3. Can I make personal contributions as well as employer contributions?
Yes, but personal contributions are subject to the relevant earnings rule, meaning you can only contribute up to 100% of your earnings (excluding dividends). Employer contributions are not limited by this rule.
4. Are there any restrictions on employer contributions for directors on a low salary?
No, employer pension contributions are not tied to your personal income. Even if you draw a low salary and high dividends, your company can still contribute up to the annual allowance, provided the payments pass the “wholly and exclusively” test.
5. How do I track and record pension contributions in my accounts?
Pension contributions should be recorded in your bookkeeping software as an employer expense. If you’re unsure, we can guide you through the process to ensure everything is compliant and properly categorised.
